Mexico Rental Property Owners Must Pay Mexican Taxes
John K. Glaab - The Settlement Company
May 6, 2016
La Paz, BCS - Mexican newspapers are full of headlines about the growing problem of foreigners who are renting their homes or condominiums and failing to pay Mexican taxes. Not only is this a violation of the terms of most bank trusts (Fideicomisos), but also it is a violation of Mexican tax law and reprisals are severe.
If you own rental property anywhere in Mexico you are required to pay the following Mexican taxes:
• Mexico Income Tax
• Mexico Value Added Taxes - IVA (16%) - if the unit is furnished
IVA is paid by tenant but collected and declared by the owner.
Many non-residents of Mexico have never paid any taxes on their rental income from properties owned in Mexico. This is a violation of Mexican tax law. The Mexico tax code clearly states that these Mexican taxes must be paid on rental income from apartments, houses, and commercial property. Failure to do so can result (and has resulted) in substantial penalties and legal problems with the Mexican tax authorities.
It is now easy for you to pay these taxes and avoid problems - even if you do not have a Mexican tax identification number. The Settlement Company® has developed a simple and easy procedure which will allow you to be tax compliant on your rental income. You do not have to suffer the consequences of failing to pay. Email or call us now at 52-612-123-5056 Ext 0 to learn more and to get started.
The Good News: The IVA you pay in Mexico is deductible on your US tax return and the income taxes you pay in Mexico can offset your US taxes on the same income dollar for dollar. You will not be double taxed.
For additional information, please email us at rentaltaxmexico(at)
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Wednesday, May 11, 2016
Rental Tax Owners Can Now Easily Pay Taxes Owed on Their Rental Properties
Tuesday, April 19, 2016
Baja Sur to Amend Constitution and Judiciary Act to Allow Alternative Dispute Resolutions (mediation and arbitration)
At a press conference, Governor Carlos Mendoza Davis, presented three initiatives sent to the State Congress on the issue of justice, with that said, it intends to reform the State Constitution to create the Council of the Judiciary Act Alternative mechanisms for dispute resolution and amendments to the Code of Civil Procedure to facilitate and expedite the enforcement of judgments.
He also said that these initiatives seek an orderly development, offering a state with legal certainty where no one is above the law or beyond.
He said the proposal for the creation of the Judicial Council of State seeking to have a dedicated and professional body of the judiciary, to address management tasks, security and judicial discipline inspection work.
He also stressed that the initiative presented also proposes reforms to the procedures for enforcement of sentences to give greater flexibility to the end of a trial, "to remove obstacles to who hopes, a slow justice is no longer fair," he said .
The state executive mentioned among the initiatives presented to the legislature, is the Law of Alternative Mechanisms of Dispute Resolution of the State of Baja California Sur, a document that seeks to have a viable tool for resolving conflicts efficiently and effective, through a system which establishes the general basis for mediation as an alternative dispute resolution mechanism between individuals, on rights in civil, commercial and family matters.
This is fantastic news for everyone due to the huge 5 to 10 year backlog of lawsuits in the Baja Sur Courts. Mediation and Arbitration will allow legal disputes to be resolved in six months to a year and signficiantly reduce the cost of dispute resolution from those for Court actions.
Monday, March 28, 2016
US Expats Must Make Required Distributions From IRA, 401K and Pensions or Pay Substantial Penalites
WASHINGTON — The Internal Revenue Service today reminded taxpayers who turned 70½ during 2015 that in most cases they must start receiving required minimum distributions (RMDs) from Individual Retirement Accounts (IRAs) and workplace retirement plans by Friday, April 1, 2016.
The April 1 deadline applies to owners of traditional (including SEP and SIMPLE) IRAs but not Roth IRAs. Normally, it also applies to participants in various workplace retirement plans, including 401(k), 403(b) and 457(b) plans.
The April 1 deadline only applies to the required distribution for the first year. For all subsequent years, the RMD must be made by Dec. 31. So, a taxpayer who turned 70½ in 2015 (born after June 30, 1944 and before July 1, 1945) and receives the first required distribution (for 2015) on April 1, 2016, for example, must still receive the second RMD by Dec. 31, 2016.
Affected taxpayers who turned 70½ during 2015 must figure the RMD for the first year using the life expectancy as of their birthday in 2015 and their account balance on Dec. 31, 2014. The trustee reports the year-end account value to the IRA owner on Form 5498 in Box 5. Worksheets and life expectancy tables for making this computation can be found in the appendices to Publication 590-B.
The penalty for failing to withdraw the minimum required distribution by the required deadline is 50% of the shortfall. Therefore if the required minimum distribution were $20,000 and you failed to meet the deadline you will owe a 50% excise tax for your delay of $10,000. There may be a way to get this waived if you have a reasonable excuse but do not count on that rules since the IRS can be tough.
Though the April 1 deadline is mandatory for all owners of traditional IRAs and most participants in workplace retirement plans, some people with workplace plans can wait longer to receive their RMD. Usually, employees who are still working can, if their plan allows, wait until April 1 of the year after they retire to start receiving these distributions. See Tax on Excess Accumulation inPublication 575. Employees of public schools and certain tax-exempt organizations with 403(b) plan accruals before 1987 should check with their employer, plan administrator or provider to see how to treat these accruals.
Have questions. Email us at ddnelson@gmail.com
Thursday, March 3, 2016
Taxes on Rental Properties in Mexico – Your Questions Answered
What are the taxes you must pay on your rental income in Mexico?
- Value Added Tax IVA (excise tax)
- Income Taxes paid to SAT on a monthly basis
When are these taxes payable?
- Monthly filed electronically
What happens if you fail to pay these taxes on your rental income?
- Serious penalties and interest can be assessed by the SAT and other tax agencies as well criminal charges might be filed. If you manage the property for the owner, you as the manager may have liability for failing to file and pay these taxes.
How can I pay these taxes as a nonresident of Mexico on my income from my Mexican real property?
- If you are a tax resident of Mexico you can use your resident tax ID number and you have your Mexican accountant use your taxpayer identification number (RFC) to file and pay these taxes. However, if you are a nonresident of Mexico it is necessary to contact a Mexican professional or Organization (such as the Settlement Company) to file and pay these taxes. The Settlement Company in Baja Sur Mexico has developed legal method where these taxes can be paid by nonresidents.
How are these taxes treated on my US tax return?
- You must report your rental income and expenses on your US tax return on Schedule E (if you are an individual taxpayer). A Mexican rental is treated the same as US rental in most respects. You can as a rental expense deduct the IVA tax and local lodging taxes. You can claim the Mexican income tax paid on your rental income as as credit directly offsetting your US tax on the same rental income dollar for dollar. You do not get double taxed on your US tax return
If you need assistance paying your Mexican income and value added taxes (IVA) on your Mexican rental property go to www.rentaltaxmexico.com for more information and assistance.
We can help you with you US tax planning and return filing requirements for your rental property in Mexico. If you fail to follow the best procedure and in many cases make a special US tax election, it can have adverse tax consequences. Email us at ddnelson@gmail.com for more.
Thursday, January 28, 2016
Tuesday, January 19, 2016
Sunday, January 17, 2016
THREE WAYS TO PULL EQUITY OUT OF YOUR US PROPERTY TO BUY PROPERTY IN MEXICO WITH US INCOME TAX BENEFITS
By Don D. Nelson, US International Tax Attorney
1. If you have lived in and occupied your US primary residence for at least 2 years out of the five years prior to the date it is sold, under US tax law $500,000 of any gain on sale ($250,000 if filing as single or married filing separately) is exempt from US taxation. This is one of the last big tax breaks left in the US tax code which can allow you to take the equity from your house tax free and purchase a property in Los Cabos.
This same rule applies to US taxes on the sale of your primary residence in Mexico.
2. Though there are limits on the amounts of interest you can deduct for personal taxes on your personal residence mortgage (which is generally limited by the interest payable on the current amount of the morgage you used to purchase the property plus the amount of funds borrowed for improvements), you can always with a second mortgage or a line of credit borrow an additional $100,000 and still have the right to deduct all interest paid on this loan on your tax return. You can use this $100,000 as part of the purchase price of your new property in Los Cabos.
An additional limitation on the tax deduction of mortgage interest on personal real property is that the total amount of mortgage loans on your personal residence, line of credit and perhaps a mortgage on your vacation home cannot exceed $1.1 million dollars. If the mortgages on these properties exceed the limits set forth above the interest on any mortgages above $1.1 million cannot be deducted for tax purposes.
The tax deductible interest rules of personal real estate loans are complex. See IRS Publication 936 at www.irs.gov for a full explanation of the limitations.
3. Though there are limits on the amount of interest you can deduct on your US tax return on your personal real property mortgages, if you convert your residence to a rental property you can then refinance the property to pull out the equity you have built up to purchase property in Los Cabos . Most often you can deduct all of that interest on your new mortgage as a rental expense on your tax return. Unlike the limits on deductible interest which exist for personal real estate, there is no limit on deductible interest on rental properties. And if allowed, you can use any tax losses produced by your rental property of offset other taxable income on your return.
So long as your modified adjusted gross inome does not exceed $100,000 on a joint US tax return you can deduct up to $25,000 of rental property losses on your tax return to offset your other income if you actively manage your rental real estate. If you modified adjusted gross income exceeds that amount the amount of losses you can use to offset other income is reduced. Any disallowed rental losses (called passive losses) carry over and can be used in the future. Read IRS Publications 527 and 925 at www.irs.gov to learn the important details of this limit.
As a side note, if you purchase property in Mexico ( whether personal or rental) and use a mortgage for part of the purchase price, the same US tax rules previously discussed apply to your property in Baja Sur.
Don Nelson is a US Tax Attorney (and a retired CPA) who has assisted Americans with their US taxes and returns in Baja Sur for over 25 years. He can be reached by email at ddnelson@gmail.com or at his US phone 949-480-1235 He is also in Cabo for about six months a year.
His website is at : www.TaxMeLess.com. Blogs with the latest news on US expat and international tax developments are at www.usexpatriate.blogspot.com and www.us-mexicantax.blogspot.com .
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